FERC Rejects PJM’s Regulation Market Tariff Revision

On March 30, 2018, FERC rejected PJM Interconnection, L.L.C.’s (“PJM”) October 17, 2017 proposed tariff revisions to improve the performance of the PJM frequency regulation (“Regulation”) market (the “Regulation Proposal”). According to PJM, the revisions were needed in light of a number of ongoing operational and market issues that had developed in the Regulation market. FERC rejected the Regulation Proposal because it did not comply with the requirements of Order No. 755 and FERC’s regulations to compensate all Regulation resources based on the actual quantity of Regulation service provided.

In 2011, FERC revised its regulations in Order No. 755 to require each independent system operator (“ISO”) and regional transmission organization (“RTO”) that compensated for Regulation service to adopt a two-part compensation system. Under this structure, all RTOs/ISOs must compensate for Regulation service based on the actual service provided, including a capacity payment that accounts for the marginal unit’s opportunity costs, and a payment for performance that reflects the quantity of frequency regulation service provided by a resource when the resource is accurately following the dispatch signal. As part of its filings in compliance with Order No. 755, PJM in 2012 introduced a performance-based Regulation market design. Under this approach, PJM uses two different types of Regulation signals: RegA, which dispatches slower, sustained-output resources such as steam and combustion resources, and RegD, which dispatches faster, dynamic resources, such as battery storage resources. Additionally, PJM uses a “benefits factor” curve in the Regulation market-clearing process to reflect the operational relationship between the RegA and RegD signal. Consistent with Order No. 755, PJM requires Regulation resources to submit a two-part offer, consisting of a capability (i.e., capacity) offer, and a performance offer, which is a price associated with the amount of work provided by each unit (sometimes referred to as “movement” or “mileage”).

Eventually, PJM proposed to eliminate “actual mileage” from the performance payment settlement, and instead, adjust capability and performance payments in settlement by the marginal benefits factor. In November 2012, FERC rejected this approach as inconsistent with Order No. 755. Specifically, FERC found that Order No. 755 required a payment for performance that reflects the quantity of Regulation service provided by a resource when the resource is accurately following the dispatch signal, and that “[b]y failing to include actual mileage in the settlement equation, PJM appears to be inconsistent with Order No. 755.” FERC also found that PJM had not demonstrated that the benefits factor is a substitute for including actual mileage in the settlement process. In response, in a January 2013 compliance filing, PJM removed the use of the marginal benefits factor in calculating the capability and performance payments in settlements, but also cautioned FERC that eliminating the marginal benefits factor could lead to operational issues and market instability.

In its Regulation Proposal, PJM represented that the operational and market issues it had cautioned in 2013 had occurred, and proposed several reforms to address them. Specifically, PJM stated that the Regulation Proposal had four main components: (1) the implementation of the Regulation Rate of Technical Curve; (2) the adjustment of performance scoring; (3) revisions to the Regulation settlements equation; and (4) revisions of how lost opportunity costs are calculated. PJM argued that these reforms were necessary because the Regulation market clearing and settlement processes currently in effect were not efficiently operating, and the two Regulation signals—RegA and RegD—were not well integrated.

In its March 30, 2018 Order rejecting PJM’s Regulation Proposal, FERC found that PJM’s Regulation Proposal was inconsistent with the directives in Order No. 755 and FERC’s regulations because, under the Regulation Proposal, Regulation resources would not be “compensat[ed] based on the actual service provided, including . . . a payment for performance that reflects the quantity of frequency regulation service provided by a resource when the resource is accurately following the dispatch signal.” FERC stated that PJM was free to propose Regulation compensation reforms tailored to address the operational and market issues that have arisen in its Regulation market, but that any such reforms must nonetheless fall within the framework established in Order No. 755, and thus must include the consideration of actual mileage in compensation. FERC noted that PJM was free to revise and resubmit its Regulation Proposal going forward.

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